Last purchase in April – Technology stocks

Man deciding if a floating tablet weighs more than some floating icons he found.

Last Tuesday I made my fourth Sharebuilder automatic purchase in April in the Technology sector. This purchase will also be my last automatic purchase as I cancelled the monthly plan which allowed $1 trading fees. Instead I’m switching over to less frequent purchases with the normal $6.95 market commission.

This decision was mostly about freeing up time, as I was getting behind with the weekly posts … case in point, today’s post! I’m not 100% decided on the allocation between my Sharebuilder and Vanguard purchases but I’m planning to invest at least $700 a month on Sharebuilder for individual stocks.

Anyway, onto my purchase. Around 8% of my total annual dividend income from stocks comes from the Technology sector at the moment; I want that value to be nearer 9% per my dividend portfolio sector allocation so I’m adding to companies I hold in the Technology sector.

The Technology sector

The Technology sector consists of companies offering hardware or software products, from internet communications to operating systems and applications to software services. It’s quite a young sector when compared to the age of the stock market itself, and is somewhat notorious because of the dot.com bubble that popped in early 2000.

The sector as whole has done well so far this year, Morningstar is showing a 10% gain year to date and a number of technology companies (MSFT, GOOG, FB) have had solid increases in the last couple of weeks, with the exception of LNKD who went in the opposite direction.

My Technology stocks

I currently own 3 companies in the Technology sector: MSFT, QCOM and INTC.

Microsoft (MSFT)

Microsoft (MSFT), the company that people love to hate, is a $392B company that’s trying to find itself in a world of iPads, iPhones, Android tablets and Smart-Things. In line with their move to a devices and services company, they’ve reorganized into six segments: Devices & Consumer Licensing; Computing & Gaming Hardware, Phone Hardware, Devices & Consumer Other, Commercial Licensing and Commercial Other. They’ve also recently started reporting the results of their Azure Cloud which I’m using to host DividendChampions.UK and this is a key growth area (I mean Azure, not my website!).

MSFT have a current dividend yield of 2.4% which has increased for the last 12 years and is backed by a payout ratio of 50%. The company is one of the elite few having the highest credit ratings. Over the previous 5 years the dividend growth has been 17.2% and any Dividend increase usually arrives in December.

Their P/E of 19.3 is above the S&P’s average of 19.1, catching up from its lull in 2013 when it traded significantly under. The estimated 5 year EPS growth is 7.3%.

Free Cash Flow has been positive for each of the last ten years with a low of $15.8B in FY2005 and a high of $29B in FY2011. TTM Free Cash Flow is $26B.

Qualcomm (QCOM)

Qualcomm (QCOM) is a $111B semiconductor company which operates in three segments: CDMA Technologies (QCT) (70% of FY14 Revenue), Technology Licensing (QTL) (29%) and Strategic Initiatives (QSI). They own a large number of patents in the area of CDMA technology used in 3G cellular connections as well as the Snapdragon processors used in smartphones. The company was founded in 1985.

QCOM has increased its dividend every year for the last 12 years, and currently pays $0.42 a share for a yield of 2.5%. Its dividend schedule is stable with dividend increases pay in May/June each year. Payout ratio is a low 45% and it’s been staying in the 30-40% range since 2009. Annualized dividend growth over the last 5 years is 19%. The 5-year average dividend yield is 1.9%, below today’s level.

Its P/E of 15 is lower than the S&P’s average of 19.5. The company’s P/E has been lower than the S&P for the last year; previously it’s always been higher than the S&P by a fair amount (at least 20%). Analysts project an 5-year EPS growth of 10%.

Free Cash Flow has been positive for each of the last ten years with a low of $2.1B in FY2005 and a high of $7.7B in FY2013. TTM Free Cash Flow is $7.2B.

Intel (INTC)

Intel (INTC) is a $152B semiconductor company that produces motherboards and CPUs, or in their words, “advanced integrated digital technology platforms”. It lost out in the smartphone and tablet market when manufacturers typically chose an ARM-based design over Intel’s low-end Atom processor, and lowered PC sales have also put pressure on the company.

The company has increased its dividend for only 1 year after freezing its dividend in 2013. Its payout ratio is 40% with a current dividend yield of 3.0%. The last 5 years’ annualized dividend growth from 2009 to 2014 is 10%.

Its P/E of 13.7 is lower than the S&P 500 average of 19.1. For the most part of the last ten years, the P/E has been significantly below the S&P average; exceptions being 2006/7 & 2009. Currently this year the P/E has dropped compared to last year’s 15.7. 5 year estimated EPS growth is 8.3%.

Intel products a lot of cash, around $20B a year on average with positive cash flow over the last 10 years. Its capital expenditure has been lower for the last two years at around one third of cash-flow, and its distributed a lot of money back to Shareholders in the form of dividends and stock repurchases. TTM Free Cash Flow is $11.8B.

INTC pays 1.2% towards my projected annual dividends.

What to buy?

Intel fails my minimum dividend growth length check (>5 years) – I bought it originally because of the brand not the dividend. I’m not convinced it’ll ever be a real dividend champion so I’m going to pass this month.

As for MSFT, as much as I like the company, I’d rather balance out my portfolio since it’s one of the biggest contributors right now. The recent price jump makes it a little more unattractive by lowering its yield. So that leaves QCOM where I have a small ($200) position so some additional capital allocation there will help it along.

Here’s the outcome visually.

#Yr

Yield

DivGr5

P/O%

EstGr5

Projected

Score

Status

MSFT

12

2.4

17.2

50.0

7.3

15

0

Hold

QCOM

12

2.46

19.8

45.4

10.5

16

37

Buy

INTC

1

2.99

10

40.9

8.2

19

0

Hold

My purchases this week

So my Sharebuilder purchases on Tuesday earlier this week were:

4.3237 shares of QCOM @ $69.385 ($300)

This purchase should increase my projected yearly dividend income by $7.

13 thoughts on “Last purchase in April – Technology stocks”

QCOM looks to be pretty undervalued here. I just wish I knew the technology more. Before I’d feel comfortable investing I need to really find out what and how QCOM makes money. I like the potential of QCOM as an investment and it could very easily be a long term winner. But it’s harder for me to understand the advantages they have long term. I know they have a huge log of communication technology patents which is a big source of their revenue/income and in theory would continue to grow as more and more mobile devices are brought on board globally. Also thanks for the mention. I wouldn’t mind nibbling in with QCOM now if I could make smaller purchases but with a larger purchase I’ll need to do more homework first.

Hi JC,
They make most of their money from patents and licensing; it’s on a gradual decline because of the rise of 4G cellular technology and they own more 3G patents than 4G ones. But since 4G is backward compatible with 3G some of those license fees carry forward. Otherwise, one potential growth area for them is the Internet of Things and they seem well positioned with low power consumption silicon and expert knowledge in wireless communications.

You’re welcome for the mention, it was a good analysis and I enjoyed reading it.

Great purchase. I’ve been thinking a lot about Microsoft lately, especially due to the new 3d/holographic things that will be coming out. I’m just in a bind with the exchange rate and tax situation… Losing 15% of any gain is not a pleasant prospect

How are ARM doing at the moment? I’ve not looked at them recently but they seemed to be on a tear with all the low-power ARM chips being included in devices; QCOM’s SnapDragon processors license ARM’s instruction set but not the processor design itself.

It seems to me that Intel is catching up though but I don’t have any numbers to qualify that statement!

I wish I could get the $1 trading plan. If I remember it used to be $12/mo. Was that still the case? If so even if you did just 2 trades a month you still came out ahead. However it was automatic so you could have easily lost that based on what things were trading for on Tuesdays. Good purchase though.

Yes it was $12/mo for 12 trades. I think it’s still available if you call and ask for it explicitly. I was buying around $1200 a month for $12, so it worked out at a 1% commission, similar to $700 for a $7 trade.

But as you say one of the cons is you have no control over the purchase price – which, while it works both ways, often seemed to mean I watched the stock prices climb on Mondays over the prices I’d selected from the prior Fridays.

We’ll see how this works out going forward; I was planning to switch eventually but I was getting sentimental about ‘losing’ the plan which was holding me back.

Thanks for sharing your recent tech buy. I know many like a few of the tech names and hold QCOM, MSFT, AAPL or IBM in their long term dividend portfolios. I hold zero tech names and don’t plan to buy any anytime soon. It’s just a sector with so many macro and micro boom and bust cycles falling in and out of favor on the turn of a dime. A little too volatile for a guy that has consumer staples as his largest sector holdings.

I definitely get the Consumer staples bias – it’s currently my #2 sector with a 12% target weight though I have Utilities slightly higher at 13%. Technology is 3rd from last, above Basic Materials and Financials, so it’s not my main focus either.

Since I already own QCOM I would have added MSFT to my company if I had to choose from the list above. The people in Redmond could turn Windows 10 into a smash hit, giving Apple and Google a run for their money in the smartphone and (dying) tablet market. On top of that they have their very strong enterprise products.

I own MSFT too, so my decision this time was about diversifying more. I think Windows 10 will be a big hit and even the recent announcement about turning a Windows smartphone into a desktop PC equivalent is a capability that no-one else has yet. I think the company has completely upped their game of late.

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